Gold Bulls Cry Inflation, AgainHere's what the evidence says about gold as an 'inflation hedge'

By Nico Isaac
Fri, 15 Mar 2013 18:15:00 ET

Conventional economic wisdom says that inflation is to gold prices what rabbit is to a dog on a leash. In other words: The one causes the other to break loose and run wild.

This notion was all-too apparent on March 15. That day, a Labor Department report revealed a .7% rise in US consumer prices in February, the sharpest increase in four years. When gold prices shot higher at the open, the usual experts put two and two together:

"Gold futures higher as US inflation data drove some investors into the safety of the yellow metal." (Reuters)

Well, as the saying goes, this isn't our first time at this rodeo. Two years ago, while gold prices were orbiting the $1800 per ounce level, inflation was still the most popular argument for continued higher prices. Here, the following news items from 2011 set the tone:

·"The main beneficiary of super low interest rates in the U.S., a weak US dollar... and ongoing questions over the stability of the financial system will be gold." (Reuters)

·"Gold is the currency of the world at the moment as investors want to protect their wealth from... accelerating consumer prices. The long-term inflation threat will amplify gold's nature as a currency and inflation hedge." (Bloomberg)

·"The printing presses of the world's biggest economies are churning away 'QE'ing.' Whether this will result in hyperinflation or a more manageable 5-10% rate is yet to be seen. Gold will appreciate in 2012, however. New highs will be reached. Gold will get above $2000 with a chance of run at $2500." (Forbes)

Since 2011, the printing presses of the world continued to churn a third round of quantitative easing alongside record low interest rates. YET, the other two parts of the equation -- soaring inflation and soaring gold prices -- did not come to pass:

ØThe annual rate of US inflation edged nowhere near "hyper" or a "more manageable" 5-10% territory, but rather stayed between 2-3% into 2012's year end.

ØAll the while, gold prices missed their $2000 target. Instead, they reversed course and have remained stuck in a sideways holding pattern between $1500 and $1800.

That leaves a looming question: If the annual rate of inflation in the U.S. had soared since 2011, would gold prices have risen then? In other words, is there a direct correlation between rising consumer prices and a bullish gold trend?

Those who say yes inevitably cite the historic precedent of the late 1970's, when US inflation rose into the double digits and gold prices rocketed eight-fold to its 1980 peak of $850 per ounce ($2400 per ounce in today's inflation-adjusted terms)

But one example does not a tried-and-true science make. Take, for instance, the years between 2006 and 2009. Gold prices more than doubled from $550 per ounce to $1200 per ounce. What did the US annual rate of inflation do during that time? It plunged from 3.24% to negative -.34%.

Bottom line: The most inflationary monetary policy in history has not triggered the long-expected super spike in gold; nor for that matter, has it triggered inflation.

In December 2010, the conventional wisdom claimed the fundamentals were unanimously bullish -- and that gold & silver would continue higher. Yet in December, EWI's Metals Specialty Service identified a textbook Elliott wave pattern: a "contracting triangle." This 20-page eBook walks you step-by-step through this opportunity-identifying pattern, by using an in-depth, real-world trading example.Download your free 20-page eBook.

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